The State of Modern Cutting Edge Macro: Narayana Kocherlakota Leaves Me Puzzled
I Do Hope This Is the Last Time I Will Ever Have to Mention Richard A. Posner...

Shichinin no Economusutai--NOT!!

David K. Levine of Washington University in St. Louis:

"It is a daunting task to bring you [Paul Krugman] up to date on the developments in economics in the last quarter century. I know that John Cochrane has tried to educate you about what we've learned about fiscal stimulae [sic][1] in that period..." and "But the stimulus plan? How can you be arguing for more? Since we are recovering before most of the stimulus money has entered the economy--isn't that evidence it isn't needed? How can you write as if you are proven right in supporting it?"

John Cochrane of the University of Chicago:

"[That spending can spur the economy] is not part of what anybody has taught graduate students since the 1960s. They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false..." and "Paul [Krugman's]’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income..."

Robert Lucas of the University of Chicago:

"Christina Romer--here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this--in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.... [I]t's a very naked rationalization for policies that were already, you know, decided on for other reasons..." and "If we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder--the guys who work on the bridge -- then it's just a wash... there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that..."

Edward Prescott of Arizona State University:

"I don't know why Obama said all economists agree on [the need for a stimulus bill]. They don't. If you go down to the third-tier schools, yes, but they're not the people advancing the science..." and "the period of the '20s was one of healthy growth, until Hoover's anti-market, anti-globalization, anti-immigration, pro- cartelization policies were instituted, brought this expansion to an end, and created a great depression..."

Eugene Fama of the University of Chicago:

"Sorry, but I’m not familiar with [Hyman] Minsky’s work" and "Haven't seen it [Paul Krugman's article]. I pay no attention to him..." and "Government bailouts and stimulus plans seem attractive when there are idle resources - unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another..."

Luigi Zingales of the University of Chicago:

"Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington..." and "Among the 37 Economics Nobel prize winners in the last 20 years, four received the prize for their contributions to macroeconomics. None of these could be considered Keynesian. In fact, it is hard to find academic papers supporting the idea of a fiscal stimulus..."

Michele Boldrin of Washington University in St. Louis:

"It is a fantasy that the economic profession at large finds the "stimulus" and the "bank bailout" plans sensible and adequate. Most economists we know oppose them.... Outside the administration, the convinced supporters of the plans are a small minority among academic economists working in those fields. Both plans contradict four decades of research and are designed to please special interest groups..." and "Is there a case for borrowing now to finance a stimulus package? People are worried about the future and are sensibly reducing their spending. Does this imply the government should step in and do the spending for them? Put that way, the idea seems like a non-starter..."

In case there is any doubt:

  1. Paul Krugman is reasonably up-to-date on research in macroeconomics over the past quarter century (Levine);
  2. that spending can spur the economy is part of what everyone who teaches their graduate students about the dot-com boom of the 1990s or about the housing-led expansion of the 2000s says, and the government's spending is as good as anyone else's as far as this is concerned (Cochrane);
  3. Christina Romer played a significant role in the design of the ARRA (Lucas);
  4. there is certainly debate over whether "advancing the science" means what Ed Prescott thinks it means (Prescott);
  5. Eugene Fama really ought to have paid a little attention to Minsky-Kindleberger at some point in his career (and really ought to be paying attention to Krugman now) (Fama);
  6. Luigi Zingales needs really, really badly to read John Maynard Keynes's "How to Pay for the War" before he embarrasses himself further (Zingales); and
  7. I don't think "working in those fields means what Michele Boldrin thinks that it means (Boldrin).

And in case there is any doubt:

  1. the fact that macroeconomic market failures are no longer getting rapidly worse is not a reason for immediately abandoning all of the policies to deal with thsoe failures (Levine);
  2. there is nothing logically inconsistent with models in which aggregate planned expenditure is different from income, and indeed Milton Friedman's, Knut Wicksell's, and David Hume's economic models are all of this type (Cochrane);
  3. even full Ricardian equivalence does not keep changes in government purchases from affecting total spending (unless government purchases are perfect substitutes for private consumption) (Lucas);
  4. Herbert Hoover was on the right wing of the American political spectrum and tried as best he could to follow pro-market, pro-globalization, pro-competition economic policies (Prescott);
  5. the savings-investment identity is an equilibrium condition, not a behavioral relationship. Thus it says nothing about how and whether changes in one form of spending will or will not call forth changes in the flow of spending as a whole (Fama);
  6. it is in fact rather easy to find academic papers supporting the idea of fiscal stimulus under appropriate conditions, if you look (Zingales); and
  7. when the prices of private bonds collapse and the prices of government bonds soar, that is a very powerful market signal that private businesses should borrow (and spend) less and the government should borrow (and spend) more (Boldrin).

The scary thing is not that Levine, Cochrane, Lucas, Prescott, Fama, Zingales, and Boldrin are wrong--people are wrong all the time. The scary thing is the level at which they are wrong: these are all freshman (ok, sophomore) mistakes--yet the seven include two past (and a year ago I would have said three future Nobel laureates in Economics).

If this doesn't frighten you, you aren't paying attention...

[1] Yes, I know, I know. What can I say? It is what he wrote.